// 1 Drafting contracts – key lessons from 2021 In this briefing we look at the lessons to be learnt from some of the English contract law cases of 2021. The stability of English contract law is one of the reasons why it is a popular choice of law to govern commercial contracts and indeed there were no major contract law developments in 2021. However, the cases we have chosen serve as useful reminders of some key issues for those drafting and managing contracts. Despite the lack of major developments in contract law itself, there is a clear shift in the way that parties are negotiating, drafting, executing, performing and managing contracts. Some of these changes are outlined on page 14. 1. Formation The questions of whether a legally binding contract exists and, if so, on what terms, frequently come before the courts. The cases outlined below considered issues such as intention to create legal relations during negotiations and the incorporation of terms by reference. The first case is an interesting example of the court finding that the parties did not intend to contract without a formal signed document, despite the absence of any "subject to contract" label. In the second case the court found that while a set of standard terms were incorporated by reference into a signed contract, a term relating to cancellation fees was not incorporated as it was onerous and the claimant had not done enough to draw the defendant’s attention to it. JANUARY 2022 London Table of contents 1. Formation 1 2. Interpretation and implied terms 3 3. Frustration and force majeure 5 4. Penalties 7 5. Exclusion and limitation clauses 9 6. Entire agreement clauses 10 7. Execution 11 8. Notice provisions 12 9. Developments in the contracting process 14 10. Contacts 15 Related links Herbert Smith Freehills British and Irish Legal Information Institute – the transcripts of all the cases we refer to are available free of charge from this website with the exception of the Acerus Pharmaceuticals case Contract law update Contract law update // 2 Jamp Pharma Corp v Unichem Laboratories Ltd  EWHC 1712 (Comm) The claimant ("Jamp") was the exclusive distributor in Canada of a drug, supplied by the defendant ("Unichem"). The agreement between the parties could be extended to include additional products by mutual agreement in writing. The parties subsequently started discussing the distribution of an additional drug on the same terms and Jamp sent Unichem a draft addendum to this effect. Unichem stated that the addendum was commercially acceptable and asked Jamp to provide partially executed copies of the addendum for Unichem’s signature. In subsequent meetings between the parties, Unichem indicated that discussions were on hold and that any legally binding agreement was conditional on the signing of the addendum. Jamp provided a signed addendum, but Unichem did not sign it. Instead, Unichem signed a contract with an alternative distributor for the second drug. When Jamp brought proceedings seeking damages for breach of contract Unichem argued that there was no binding contract between the parties in relation to the second drug, as it was conditional on its terms being set out in a formal, signed addendum. The High Court noted that it is a matter of construction whether an offer is conditional on it being accepted in a prescribed way. Even where an agreement envisages a mode of acceptance, for example, as in this case, by including space for signatures, this will not itself amount to a prescribed mode of acceptance. The parties' "subjective state of mind" was not relevant in ascertaining intention to create legal relations. Rather, the court should consider what was actually communicated in words or conduct throughout the correspondence and could also consider the parties' subsequent conduct to prove the existence of a contract and its terms, although not as an aid to its interpretation. In this case, although negotiations were not stated as being "subject to contract", it was clear from the parties' exchanges that there was a mutual understanding that any agreement relating to the additional drug would only become effective once the addendum had been signed. Blu-Sky Solutions Ltd v Be Caring Ltd  EWHC 2619 (Comm) Blu-Sky entered into negotiations with Be Caring Ltd ("BCL") to provide connections for 800 mobile phones for a minimum period of 48 months. BCL signed an order form to that effect, which referred to Blu-Sky's standard terms and conditions ("STCs"). When BCL subsequently cancelled the order Blu-Sky started proceedings to recover £180,000 in "administration charges" in accordance with clause 4.6 of the STCs. The key questions for the court were whether the order form was a binding legal contract, whether the STCs were properly incorporated, whether clause 4.6 was specifically incorporated given its "unusual and onerous terms" and, if so, whether it was void as a penalty. Blu-Sky argued that by signing the order form BCL had created a binding contract. The court agreed with Blu-Sky and rejected BCL's claim that it understood the order form to be equivalent to a heads of terms, rather than a formal intention to create legal relations. The judge explained that "understanding is irrelevant as a matter of law" especially where, as in this case, this mistaken understanding had not been communicated to the counterparty. The court found that the STCs were incorporated by reference to a website, on which they could be accessed via a link; if BCL had visited the website, it would have been reasonably clear that the STCs were applicable upon signing the order form. Having established that the STCs were sufficiently incorporated, the court moved to consider whether clause 4.6, setting out "administration charges" on cancellation, was specifically incorporated. Following the principle in Goodlife Foods Ltd v Hall Fire Protection Ltd  EWCA Civ 1371, covered in our 2018 contract briefing, a clause which is particularly onerous or unusual will not be incorporated unless it has been fairly and reasonably brought to the counterparty's attention. The fact that the administration charge of £180,000 bore no relationship to the administration costs incurred, or likely to be incurred, by Blu-Sky, nor was it proportionate to any reasonable estimation of loss, made the clause particularly onerous. Contract law update // 3 The court further concluded that the clause had not been fairly and reasonably brought to BCL's attention for several reasons. BCL was not told that cancellation would lead to extensive liability and the order form "positively obfuscated" the nature of the contract and did not explain the purpose of the STCs or warn of the liability that would be incurred on cancellation. Finally, Blu-Sky made no attempt to highlight clause 4.6 which was "cunningly concealed" within the STCs. In any event, the clause would be void as a penalty as it was out of all proportion to Blu-Sky's legitimate interest in the performance of the contract. Practice points ‒ formation • Remember the basic requirements for a binding contract – an agreement, which is intended to be legally binding, supported by consideration, and sufficiently certain and complete to be enforceable. • Take care to avoid entering into a contract unintentionally and avoid saying anything in negotiations or correspondence which may subsequently be construed as evidence of an intention to be contractually bound. • Although contract negotiations can be impliedly "subject to contract", clearly state the condition under which negotiations are carried out, for example by expressly providing that any agreement is "subject to contract". • Be aware that, even if a "subject to contract" proviso has been used, subsequent conduct may indicate that a binding agreement has been reached. • Be clear about when draft contracts are in an approved and agreed form and then have a clear procedure for both parties to enter into the contract. • Ensure that any standard terms are expressed in clear terms, set out in a user-friendly way and clearly incorporated into the contract. Draw particular attention to any onerous or unusual provisions. 2. Interpretation and implied terms The cases in this section are all Court of Appeal decisions considering different aspects of interpretation and implied terms. The first case provides a relatively rare example of a court finding that a contract should be interpreted against its clear literal meaning. It considers the application of the Chartbrook principle, by which clear mistakes in the drafting of a document can be corrected as a matter of construction. The second case is a more typical interpretation case following the approach set out in the leading Supreme Court decision Wood v Capita  UKSC 24 (see our 2017 contract briefing). The court reiterated that construction is a unitary exercise; it does not matter whether the analysis starts with the contractual language or the relevant context so long as the court balances the indications given by each. The third case is a reminder of the strict approach which the English courts adopt when asked to imply a term into a contract. MonSolar IQ Ltd v Woden Park Ltd  EWCA Civ 961 Woden Park Ltd ("WPL") and MonSolar entered into a 25-year lease, containing a rent review clause which included a formula for calculating revised rent. MonSolar, as tenant, argued that this formula would lead to disproportionately high payments which did not align with the purpose of such a clause which it said was to adjust rent in line with inflation. At first instance the judge applied the principle in Chartbrook Ltd v Persimmon Homes Ltd  1 AC 1011, that a court can interpret a clause against its literal meaning where it is clear that the drafting contained a mistake and clear how that mistake should be corrected. If either of these requirements is not satisfied, the contract can only be corrected by a claim for rectification, which was not pleaded in this case. The court accepted MonSolar's claim and reinterpreted the clause on its "true construction". WPL appealed on two main grounds. Firstly, it submitted that the clause did not contain a clear error. The Court of Appeal rejected this argument, agreeing with MonSolar that the ordinary purpose of a rent review clause is to adjust rent payments according to changes in a specified index and that it was reasonable to assume that was the intention in this case, as the lease referred to the RPI index and stated that payments Contract law update // 4 "shall reflect increases in the cost of living". However, this would not be achieved on the literal interpretation of the formula which would produce the "commercially nonsensical" result of adjusting rent based on the cumulative change in RPI since the start of the lease. The court concluded that this outcome was so arbitrary and irrational that it could not have been intended. The Court of Appeal also rejected WPL's second argument, that it was not clear how any drafting error should be corrected and in particular that it was not clear whether the parties actually intended an upwards only rent review. The Court of Appeal agreed with the judge that the "correction must reflect the nature of the mistake". The fact that the parties might have intended an upwards only rent review but failed to include a clause to that effect would be an entirely different mistake, unrelated to the correction of the formula for calculating revised rent payments. Nord Naphtha Limited v New Stream Trading AG  EWCA Civ 1829 New Stream, as seller, contracted to sell an amount of diesel to Nord Naphtha, as buyer, the diesel being sourced from a refinery in Russia. The contract provided for an advance payment and included a force majeure clause excusing performance in certain circumstances, including interference with supplies where that was not within the supplier's control. Clause 14.5 of the contract provided that if the contract was terminated: "nothing herein shall impair the obligations by the Seller to repay to the Buyer the amount of the advance payment… in the event that the delivery of the [diesel] is not made or only partially made due to Force Majeure Event". The Russian refinery issued a comfort letter to the buyer, which guaranteed that diesel would be shipped to the seller for supply to the buyer and confirmed that the refinery would arrange repayment of the advance payment to the extent that there was a shortfall in delivery. The buyer paid an advance to the seller in accordance with the contract but, following the collapse of the Russian refinery, the seller invoked the force majeure clause and the diesel was never delivered. The buyer terminated the contract and sought repayment of the advance from the seller, which argued that the contract did not contain an express right to repayment and that the buyer should instead claim against the refinery under the comfort letter. At first instance the court rejected this argument, holding that the comfort letter could not affect the parties’ rights and liabilities under the contract. The Court of Appeal dismissed the seller's appeal and disagreed with its argument that the language of the contract should be considered before the wider commercial context; the Supreme Court’s comments in Wood v Capita show that it does not matter whether the analysis starts with the contractual language or the wider commercial context. Ultimately, the Court of Appeal found that, as a matter of construction, the contract between the parties obliged the seller to make repayment in the circumstances, both because that was the natural meaning of the language and because a different construction would offend business common sense. The comfort letter did not change this analysis as it was obviously "commercially worthless"; it had expired by the date of termination of the contract and, even when it was valid, it was revocable at will by the refinery in force majeure circumstances. In its judgment the Court of Appeal commented that it would be "surprising" if a contract for the sale of goods did not include a provision requiring the return of an advance payment in the event of non-delivery. The court considered this to be a reasonable starting point for the construction of such a clause. Nonetheless, the court’s criticism of the contract’s "clumsy drafting" serves as a reminder that the terms of a repayment obligation – or indeed any contractual provision – should be clearly expressed to avoid such disputes. Yoo Design Services Ltd v Iliv Reality PTE Ltd  EWCA Civ 560 The parties had entered into a Design Service Agreement regarding a luxury property development, under which Yoo Design would receive one third of its fee upfront with the remaining two thirds becoming payable on the sale of any flats within the development. No flats were sold and Yoo Design claimed for breach of implied terms, including that IIiv Reality would market the flats with due diligence and expedition and sell them within a reasonable time. Contract law update // 5 The Court of Appeal agreed with the judge at first instance that terms will only be implied into a contract where they satisfy either the business efficacy test (ie, the contract would not make commercial sense without implying the term) or the obviousness test (ie, the term was so obvious that it did not warrant express inclusion). In considering business efficacy, the court found that the agreement had "practical and commercial coherence" without the implied term; it was clear that Yoo Design would receive one third of its retainer up front with the remainder being conditional upon sale. There was therefore no need, as a matter of business efficacy, to imply an obligation that the flats would be sold within a reasonable time. In considering the obviousness test, the court found that asking the "officious bystander" whether the parties had agreed that Iliv Reality would sell the flats within a reasonable time would not produce an unequivocal "yes" response, but instead a "host of alternative opinions". As the marketing obligation would be dependent upon the sale obligation, this ground of appeal was also dismissed. Practice points – Interpretation and implied terms • Take care when drafting to ensure that all clauses accurately reflect the agreement between the parties. • Break up clauses into sub-clauses and separate paragraphs to make provisions clearer and pay careful attention to the impact of grammar and punctuation. • Check that any formulae and calculations included in the agreement operate as intended and consider including worked examples. • Test the wording of your contract from a litigator's point of view and rectify any potential uncertainties. Where practical, demonstrate in the drafting the commercial rationale for key provisions. • Don’t rely on the courts implying a provision into a contract as the English courts take a strict approach – if a provision is required it should be expressly included. 3. Frustration and force majeure Cases about frustration and force majeure have not been particularly frequent in the past. However, since the beginning of the Covid-19 pandemic and the related restrictions there has been a particular focus on these provisions as contractual counterparties look for relief from their obligations. The first case in this section addresses frustration which occurs where performance of a contract has become so radically different to what was contemplated at the time of contracting that it would be unjust for the contract to continue. Given the narrow limits of the doctrine of frustration, contracts often include a force majeure clause setting out what is to happen if unexpected events intervene – providing, for example, for obligations to be temporarily suspended if performance is prevented by specified types of event. As the second case indicates the wording of the relevant clause and the factual background pattern is key. The case is highly fact-specific and involved consideration of an atypical force majeure clause, but it nevertheless demonstrates that the English courts are willing in principle to recognise that the Covid-19 pandemic, or related factors, could amount to a force majeure event. In addition, the case of Nord Naphtha Limited v New Stream Trading AG, covered in the section on interpretation and implied clauses above, also concerned a force majeure clause. Bank of New York Mellon (International) Ltd v Cine-UK Ltd  EWHC 1013 The claimant landlords sought summary judgment in their claims against the defendant tenants for rents which had fallen due under three commercial leases. Each lease contained provisions defining the prescribed use of the premises, as a multiplex cinema, bingo hall and sport and leisure goods retailer, respectively. Each lease also contained a qualified covenant against assignment or underletting. The rents in question covered periods from 25 March 2020 onwards, during which the Covid-19 pandemic and consequent statutory regulations meant that all of the premises were required to close to the public for significant periods. Contract law update // 6 The tenants put forward various arguments that they had a real prospect of defending the claims for payment of rent, including that they were relieved from their obligations to pay the rents due to a suspensory frustration, ie, a short-term frustration following which the leases would continue as before, or alternatively due to supervening illegality or temporary failure of consideration. The High Court rejected all of the tenants’ arguments and granted summary judgment in favour of the landlords. In relation to frustration, the court rejected the tenants' argument that the leases had been "temporarily frustrated" during the periods in which the premises were forced to close, finding that there is no such thing as temporary frustration as a matter of law; the effect of frustration is to bring the contract to an end, so that it cannot then be revived. The court also found that it was clear that the leases had not been frustrated altogether, although it was accepted that an enforced closure due to the pandemic and related restrictions could result in the frustration of a commercial lease, particularly where the only permitted use of the premises had become impossible. However, in this case an anticipated closure of around 18 months would not be sufficient to result in frustration in the context of leases of 15 years or more, where the leases would still have more than a year to run after the disruption had ceased. Dwyer (UK) Franchising Ltd v Fredbar Ltd & Bartlett  EWHC 1218 (Ch) Dwyer was the franchisor of a plumbing and drain repair services franchise and entered into a franchise agreement with Fredbar, as franchisee, and the second defendant, Mr Bartlett, as guarantor and the only employee of Fredbar. The franchise agreement provided that it would be suspended during any period in which either of the parties was prevented or hindered from complying with their obligations: "by any cause which the Franchisor designates as force majeure including strikes, disruption to the supply chain, political unrest, financial distress, terrorism, fuel shortages, war, civil disorder, and natural disasters". In March 2020, Mr Bartlett was notified by the health authorities that his son was vulnerable and that the best way of avoiding the Covid-19 virus was to stay at home for the next 12 weeks. He asked the franchisor about the possibility of suspending the agreement under the force majeure clause as there had been a drop in demand for his services resulting from the pandemic. A few days later, he emailed again requesting suspension of the agreement, setting out detailed reasons including his need to self-isolate for the protection of his son. The franchisor refused Mr Bartlett’s request, noting that plumbing services could still be provided as this was a key worker service, and fewer jobs did not constitute a force majeure event. Fredbar purported to terminate the agreement, on the grounds that, among other things, the franchisor had failed to comply with its obligations under the force majeure clause in refusing to designate a force majeure event. The subsequent court case considered issues around the purported termination and the franchisor's claims for damages, repayment of fees and injunctive relief to prevent Mr Bartlett breaching the restraint of trade provisions in the agreement as well as the force majeure issue. The court found that the franchisor's power to designate a force majeure event was subject to a duty to exercise it honestly, in good faith and genuinely and not "arbitrarily, capriciously, perversely or irrationally". The franchisor was in breach of this duty in refusing to designate a force majeure as it had failed to take account of all relevant matters, in particular the need for the franchisee to isolate for his family’s welfare. The claimant’s breach of that clause was, commercially and objectively, a breach of an important term which went to the root of the commercial purpose of the agreement and was therefore a repudiatory breach by the franchisor. However, on the facts, the agreement had been affirmed by Mr Bartlett’s acceptance of an alternative offer from the franchisor that allowed him to continue to self-isolate, even without designating a force majeure. Therefore, Fredbar had no basis for terminating the contract in July 2020. Practice points – frustration and force majeure • Don't rely on the law of frustration – its application is limited and the bar to establish it is very high. Contract law update // 7 • Instead consider including a force majeure clause setting out what is to happen if unexpected events intervene and remember to set out what will constitute a force majeure event – think about which events should be expressly included as force majeure and whether any events should be expressly excluded. • Think about how the contract should operate in a force majeure situation and reflect that in the drafting. • Remember that a force majeure clause does not excuse liability for events which were within a party's control. While there is no general requirement under English law that an event must be unforeseeable to give rise to a claim for force majeure relief, the more foreseeable an event is the more it may be possible to guard against it having an impact on contractual performance, and the more likely a failure to do so may be seen as the real cause of non-performance. • If there is a particular event which may impact on the ability to perform contractual obligations consider dealing with it expressly rather than seeking to rely on a generic force majeure clause. 4. Penalties Cases considering whether clauses are unenforceable as penalties always generate interest in how the courts are applying the test as reformulated in the Supreme Court decision of Makdessi v Cavendish  UKSC 67 (see our 2015 contract briefing). The Makdessi test, applied in the first two cases below, involves assessing whether the clause in question is a secondary obligation ie, a clause triggered by the breach of a primary obligation, and then determining whether the detriment imposed by the clause is out of all proportion to the innocent party’s legitimate interest in enforcing the counterparty’s obligations under the contract. The third case is a Supreme Court decision which restores the orthodox interpretation of a liquidated damages clause in circumstances where a contract is terminated before completion of relevant works. Permavent Ltd & another v Makin  EWHC 467 The defendant, Mr Makin, ran a roof supply business through two companies: Permavent Limited, in which Mr Makin was a managing director, and Greenhill Industrial Holdings Limited ("Greenhill"), in which Mr Makin was a shareholder (together the "claimants"). Integral to the business was the Easy Roof System invented by Mr Makin. A dispute arose regarding the business and the IP rights surrounding the system. Under a settlement agreement Mr Makin's shares in Greenhill were bought back and his IP rights in the roof system were assigned to the company. In exchange, Mr Makin would receive a quarterly payment equivalent to 5% of Greenhill's gross turnover provided that he would not claim entitlement to, challenge Greenhill's ownership of, or challenge the validity of, any of the assigned IP rights (clause 2.10). The consequences of doing so were set out in clause 2.11; he would in effect lose any entitlement to future payments, have to repay any payments already received and pay a further £616,667 to Greenhill. Mr Makin proceeded to seek registration of an equitable interest in five of the patents and patent applications comprising the IP rights. The claimants sought an injunction to prevent Mr Makin's registrations and to enforce clause 2.11. The question before the court was whether clause 2.11 was an unenforceable penalty. It was common ground that clause 2.11 was a secondary obligation triggered by a breach of the primary obligations in clause 2.10. The parties agreed that the clause sought to impose a detriment to protect a legitimate interest of the business but the court had to consider whether the detriment was proportionate. The court rejected Mr Makin's submission that only the actual breach, which was at the lower end of the scale of possible breaches, should be considered. Instead, proportionality should be assessed between the detriment and the interests which the clause sought to protect as at the date of the agreement. The obligations in clause 2.10 were to be seen, together, as restricting Mr Makin from interfering in any way with the IP rights. The High Court concluded that despite being "undoubtedly extremely harsh", the detriment imposed by the clause was not "extravagant, exorbitant or unconscionable". The clause was not therefore penal in nature Contract law update // 8 and could be enforced. The judge also took into account the fact that Mr Makin had entered into the settlement agreement with the benefit of legal advice, and there could be no doubt that he and his solicitors were alive to the full consequences of the clause. Ahuja Investments Ltd v Victorygame Ltd  EWHC 2382 (Ch) The High Court held that a default interest clause was an unlawful penalty. The clause provided for 12% interest per month (compounded monthly) on amounts outstanding after the redemption date. Applying the principles in Makdessi, the court found that the interest provision properly constituted a secondary obligation imposed as a result of breach of a primary obligation, clarifying that this "is a question of substance and not of form". The court moved on to consider whether the default interest rate was in all the circumstances, extravagant, exorbitant, or unconscionable. Based on several factors, including the lack of evidence presented that such interest rates were aligned with current market practice or a genuine reflection of the borrower's creditworthiness in the event of default, and the fact that they represented a 400% increase in the interest rate applicable prior to default, the court found that the default interest clause was a penalty and therefore unenforceable. Triple Point Technology, Inc. v PTT Public Company Ltd  UKSC 29 Triple Point and PTT entered into a contract for the supply of a software system in two phases (each containing nine stages of work). Under the contract, Triple Point was required to complete each stage by a specified date and was entitled to receive a portion of the payment price as it completed the successive stages. Phase 1 of the project was to be delivered by a certain time and the contract provided that if Triple Point failed to deliver the work by that time it was: "liable to pay the penalty at the rate of 0.1% … of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…" (Article 5.3). Triple Point completed two stages of Phase 1, with delays, and suspended the remaining work, which led to PTT terminating the contract. Triple Point brought proceedings to recover outstanding sums and PTT counterclaimed for liquidated damages and general damages arising from termination of the contract. Regarding PTT's counterclaim, the key issue was whether liquidated damages were payable under article 5.3 where work was not completed before the contract was terminated. At first instance, the High Court found that PTT was entitled to recover liquidated damages for delay up until the date of termination. The Court of Appeal focused on the precise wording of article 5.3 and held that PTT was only entitled to liquidated damages in respect of the completed stages (and not work that had not been completed and therefore had not been accepted). See our 2019 contract briefing for further details of the Court of Appeal decision. The Supreme Court overturned this decision finding that, on a proper interpretation, the clause should be understood to mean "up to the date (if any) PTT accepts such work", with the addition of the underlined words. It reasoned that the literal interpretation, as adopted by the Court of Appeal, would go against the common purpose of such a clause and would result in any accrued rights to liquidated damages simply disappearing. Practice points – penalties • Pay attention to any contractual provision which deals with the consequences of a breach and assess whether it could be challenged as a penalty. • Keep a record of any negotiations around the consequences of breach to help show that the clause is proportionate to the legitimate interest of the innocent party in enforcing the primary obligations of the contract. • Where possible, structure any provisions requiring a potential future payment so that payment is required following a triggering event rather than for breach of contract. Similarly, structure provisions involving the loss of a right to a future payment so that performance or compliance is a pre-condition to the payment, rather than payment being forfeited if there is a breach. Contract law update // 9 • Whilst not strictly necessary, consider expressly stating the effect of termination on liquidated damages to avoid uncertainty. • Although the court will consider substance over form, avoid using the term "penalty" in any clause setting out the consequences of breach. • Remember that the courts may be less likely to find that a clause is an unenforceable penalty where both parties have had the benefit of legal advice. 5. Exclusion and limitation clauses The courts often have to consider exclusion and limitation clauses in the disputes that come before them, with one party seeking to rely on the relevant clause and the other party arguing that the clause does not apply. The cases in this section illustrate some of the issues that commonly arise. The first two cases consider the construction of such clauses and the third case looks at the incorporation of standard terms and conditions and the operation of the reasonableness test under the Unfair Contract Terms Act 1977. Mott MacDonald Ltd v Trant Engineering Ltd  EWHC 754 (TCC) The claimant ("Mott") entered into a contract with the defendant ("Trant") to provide design consultancy services. Following a dispute, the parties entered into a Settlement and Services Agreement (SSA) setting out the scope of services to be delivered. Mott later brought proceedings to recover payment under the SSA and Trant counterclaimed, contending that Mott had "fundamentally, deliberately, and wilfully breached its obligations" and was therefore unable to rely on the exclusion clauses contained in the SSA. Mott sought summary judgment as to the applicability of the exclusion clauses in the SSA. The parties agreed on the general approach to the construction of contracts, to interpret clauses in line with clear wording used, as set out in the Supreme Court decision in Wood v Capita Insurance Services Ltd  UKSC 24 (see our 2017 contract briefing). However, they disagreed on the construction of exclusion clauses. Mott submitted that the general approach should apply, accepting however that a "degree of strict construction" was necessary depending on whether the clause sought to limit liability or exclude it entirely. In this case the clause sought generally to limit liability (excluding it only for a specific set of circumstances). Mott argued that, had the parties intended that the clause should not cover deliberate or fundamental breach, this would have been reflected in the wording. Trant submitted that there was a strong presumption against the exclusion of liability for a deliberate repudiatory breach, rebuttable only by "strong language" to the contrary. Trant also argued that, even if the presumption were not applicable, context was relevant for the purpose of construction and that Mott's interpretation would reduce its obligations under the SSA to mere declarations of intent. The court held that the correct approach was to construe exclusion and limitation clauses by reference to the generally applicable rules of contractual construction "so as to give effect to the parties' intention as disclosed by the language read in context". There is no presumption against the exclusion of liability and no particular form of words is. Applying this approach, the court found that the clauses in question applied to any breach by Mott including breaches which were fundamental, deliberate, or wilful. This interpretation did not "render the contract nugatory" as the total payment received by Mott would be less than if it had performed its obligations. Acerus Pharmaceuticals Corporation (incorporated in Canada) v Recipharm Ltd  EWHC 1878 The claimant ("Acerus") was a pharmaceutical company that entered into an agreement with the defendant ("Recipharm"), under which Recipharm would manufacture and supply a particular drug. Recipharm failed to supply the drug in accordance with its obligations and Acerus brought proceedings for loss of profit and costs. Recipharm sought to rely on the following comprehensive exclusion clause: "In any event and notwithstanding anything contained in this Agreement in no circumstance shall either party be liable to the other in contract, tort (including negligence or breach of statutory duty) or otherwise howsoever to the other, and whatever the cause thereof (i) for any increased costs or expenses, (ii) for any loss of profit, business or contracts, revenues or anticipated savings or (iii) for Contract law update // 10 any special indirect or consequential loss or damage of any nature whatsoever arising from [the agreement]." Recipharm submitted that the wording of the clause was clear and should therefore be interpreted in line with its ordinary meaning. Acerus argued that the meaning of the clause should be informed by its context and that it should not apply. Firstly, it would not make business common sense to interpret the clause as excluding all liability where this would effectively allow Recipharm to walk away from its obligations without consequence. Acerus also argued that the placement of the relevant clause (in a section dealing with third party claims) meant that it could not have the effect put forward by Recipharm. The court, in a preliminary issues ruling, followed the reasoning of the Supreme Court in Rainy Sky v. Kookmin  UKSC 50 which made clear that both language and context are relevant. Although the wording of the exclusion clause was plain, so was the context, and in light of its positioning it was found not to apply in this case. Phoenix Interior Design Ltd v Henley Homes plc and another  EWHC 1573 The claimant ("Phoenix") contracted with the defendant ("Henley Homes") to provide interior design services, furniture and fittings. The relationship between the parties deteriorated and Phoenix issued proceedings to recover unpaid fees. Henley Homes counterclaimed that the fees payable on completion (50% of the contract price) were not due, as performance was so inadequate it was as though completion had never occurred. The Phoenix standard terms and conditions warranted that the goods provided "will correspond with their specification" and "be free from defects". However, clause 8.2.3 caveated that "[Phoenix] shall be under no liability under the above warranty … if the total price of the Goods has not been paid by the due date for payment". A key consideration for the court was whether the Phoenix standard terms and conditions were incorporated and, if so, whether clause 8.2.3 met the requirement of reasonableness under the Unfair Contract Terms Act 1977 ("UCTA"). The High Court found that the standard terms and conditions had been incorporated by reference. Henley Homes had received a hard copy of the standard terms and conditions and a copy by email. The signed contract was expressed to be subject to the terms and conditions and, although not attached as stated in the contract, it was obvious that the reference was to the terms and conditions previously provided. However, the court found that clause 8.2.3 did not satisfy the UCTA reasonableness test and Phoenix could not rely on the clause to limit its liability. The clause was uncommon, and Phoenix failed to explain why an anti-set off clause could not have been used instead. It was also "tucked away in the undergrowth" of the standard terms and conditions and potentially exorbitant given that the slightest delay or deduction by Henley Homes in making payment could bar all its rights of redress against Phoenix regarding the quality of the goods. Practice points – limitation and exclusion clauses • Ensure that any standard terms and conditions are properly incorporated into the contract and bring any unusual or onerous clauses to the attention of your counterparty. • Consider the application of UCTA in business to business contracts; some liabilities cannot be limited and some liabilities can only be limited to the extent that the limitation satisfies the reasonableness requirement. • Remember that limitation and exclusion clauses, like all contractual provisions, will be construed in the context of the contract as a whole. 6. Entire agreement clauses The following case does not create any new law but serves as a useful reminder that an entire agreement statement (without any non-reliance wording or express exclusion of liability) is not sufficient to prevent a claim for misrepresentation. Contract law update // 11 MDW Holdings Limited v James Robert Norvill & Ors  EWHC 1135 MDW Holdings ("MDW") purchased an environmental services company from the defendants in October 2015. The company’s business required an environmental permit and discharge consent from the sewerage authority and the share purchase agreement contained several warranties including that the company had complied with all applicable laws, held all necessary licences and was not in breach of those licences. The sellers also warranted that there were no threatened or pending proceedings against the company and no circumstances likely to give rise to any such proceedings. The SPA included the following entire agreement clause: "This agreement constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter." Prior to the acquisition, the company had provided false figures to the sewerage authority relating to the limits of contaminants allowed under the discharge consent, as the true figure was over the permitted limit and the sewerage authority had sent letters to the company threatening proceedings. MDW subsequently claimed for breach of warranty and fraudulent misrepresentation. The court found that the entire agreement clause did not preclude MDW from bringing a misrepresentation claim based on pre-contractual representations. The clause related to contractual obligations or liabilities and did not cover reliance on prior statements or claims of a non-contractual nature. Neither the entire agreement clause nor any other provision of the SPA stated that there had been no representation, or that there had been no reliance on a representation, or that liability for a representation was excluded. Practice points – entire agreement clauses • To be fully effective for the party that wants to rely on it, an entire agreement and non-reliance clause should contain: – a statement that the written agreement contains all the terms of the contract; – a statement of non-reliance on any pre-contractual representation or an exclusion of liability for misrepresentation; – a statement that only contractual remedies will be available; and – a carve out for fraud (there is doubt whether this is strictly necessary but in any event it operates as a reminder that fraud can never be excluded). • Consider whether it is possible to insert a more limited clause, without the exclusion of misrepresentation, when drafting for the benefit of the person most likely to want to claim in relation to representations. • Remember that the UCTA reasonableness test may apply to exclusions of liability for misrepresentation. 7. Execution Cases around execution are relatively common, particularly around the necessary formalities. The following Court of Appeal case considered a slightly different issue, namely the identity of the contracting party where the description of the party in the contract was not replicated in the signature block. Gregor Fisken Limited v Bernard Carl  EWCA Civ 792 A contract for the sale of a Ferrari 250 GTO was agreed between the seller, Mr Carl, and the buyer, Mr Fisken who contracted via his corporate entity Gregor Fisken Limited ("GFL"). The contract described GFL as an "agent for an undisclosed principal". However, GFL's signature was unqualified, with nothing to indicate that GFL signed in its capacity as an agent. Contract law update // 12 A dispute arose and at first instance the judge held that the contract remained in place and that GFL was entitled to enforce it. Mr Carl appealed, arguing that GFL could not enforce the contract as it was not a party to it. It was common ground that GFL was not in fact acting for a principal despite the contract describing GFL as agent. The Court of Appeal noted that the fact that GFL intended to be the principal on the contract could not be decisive as to whether it was the principal. However, it held that a description of a party in the body of the contract cannot trump "the role assigned to that party in its signature to the contract". Accordingly, GFL was entitled to enforce the contract. Practice points – execution • Ensure that you pay sufficient attention to the execution formalities; parties in dispute will often take execution points to court in an attempt to invalidate agreements. • Pay careful attention to the identity of the contracting parties and ensure that there is no confusion within the document and that the signature blocks matching the description of the parties. • Remember that deeds have additional requirements of formality, namely: – the document must make clear on its face that it is intended to be a deed; – the document must be correctly executed as a deed, meaning that an individual's signature must be witnessed and a company must execute by its common seal, by the signatures of two directors or one director and a secretary or by one director with a witness; and – the deed must be delivered – although there is a rebuttable presumption that a deed executed by a company is delivered on execution, there is no such presumption where a deed is executed by an individual. 8. Notice provisions Each claim as to whether a notice has been given in accordance with the relevant contractual requirements will turn on the precise contractual wording and the factual background to the dispute. However, the frequency with which cases focussing on notice provisions come before the courts highlights the importance of paying attention to these clauses both when drafting the contractual provision and when giving notice. The following cases from 2021 both relate to notices given under a share purchase agreement (or SPA). In the first case the Court of Appeal found the notice to be valid, taking the recipient's knowledge into account when determining whether the notice contained the reasonable detail required. In contrast, the notice in the second case did not comply with the SPA's requirements as to timing and content. Dodika Ltd v United Luck Group Holdings Ltd  EWCA Civ 638 The case involved an SPA in which the sellers indemnified the buyer for any tax liabilities of the target group arising from pre-completion events. In order to bring a claim under the indemnity the buyer was required to give "written notice to the Warrantors stating in reasonable detail the matter which give [sic] rise to such Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed in respect thereof". After completion of the acquisition, the Slovenian tax authorities started investigating one of the target group companies. Representatives of the sellers were kept informed of the material developments of the investigation, given access to documents, attended key meetings and were generally involved in strategy discussions. In June 2019, the buyer sent a letter to the sellers, giving written notice of a claim under the SPA; the notice referred to the tax investigation, provided a chronology and noted that it was not possible to quantify the amount claimed. The buyer also withheld the final tranche of the purchase price in accordance with the terms of the SPA. The sellers brought a claim for summary judgment for the release of the amount in escrow, on the basis that the buyer’s claim notification did not comply with the requirements of the SPA’s notice provision. The High Court accepted the sellers’ argument and found that the buyer’s notice of claim failed to comply with the notification requirements as it did not identify the matters which gave rise to the claim; see our 2020 contract briefing. Contract law update // 13 The Court of Appeal ruling focused on two key questions: (i) what was the matter which gave rise to the claim and (ii) did the June 2019 letter state that matter in reasonable detail. In relation to the first question the Court of Appeal upheld the High Court decision that the matter giving rise to the claim was the underlying pre-completion facts rather than just the tax investigation itself. In relation to the second question the sellers accepted that, on the facts of this case, further information in the June 2019 letter would not have made any difference because the sellers’ representatives had full knowledge of the details of the tax investigation. However, they argued that the existing knowledge of the recipient of a notice should not affect the question of whether the notice contained what it should contain. The Court of Appeal accepted that the terms of a notice clause must be complied with. However, in this case the SPA did not specify precisely what detail the notice had to include, only stating that the matter had to be explained "in reasonable detail". What is reasonable must depend on all the circumstances but, in principle, the knowledge of the recipient is capable of being relevant to the assessment of reasonable detail and the court should be "slow to reach" the conclusion that a notice was defective for failing to set out further information which would serve no useful purpose to the recipient. The Court of Appeal therefore overturned the High Court decision on this point meaning that the notice was not defective. Arani & Ors v Cordic Group Ltd  EWHC 829 This case also involved an SPA with a portion of the purchase price retained in an escrow account. The SPA provided that, unless a claim for breach of warranty had been notified to the sellers by 1 March 2020, the funds in the escrow account were to be released to the sellers. On 2 March 2020, the buyer wrote to the sellers alleging breach of warranties and stating that funds in the escrow account would not be released until the issue was resolved. The sellers applied for summary judgment of their claim for the release of the escrow sums, arguing that the 2 March letter had failed to particularise any breach of warranty and had been served outside the period for notifying a claim under the SPA. The buyer counterclaimed for (among other things) fraudulent breaches of warranty and argued that it was entitled to set off that claim against the amounts in the escrow account. The judge held that the buyer's letter did not comply with the SPA’s requirements for notification of a claim for breach of warranty as it was sent outside the specified period and did not contain full particulars of the claim. The notification provisions (along with the other contractual limitations and exclusions) were expressly disapplied insofar as a claim was based on fraud (and would not have been effective to preclude fraud claims in any event) so the buyer's counterclaim for fraudulent breach of warranty could proceed to trial. However, the SPA contained a no set-off provision meaning that the funds in the escrow account had to be released to the seller. Practice points – notice provisions • Don't neglect the boilerplate provisions in any contract; disputes about how the contract is to work are just as likely as disputes about the substantive provisions. Ensure that contractual provisions about notice or service are clear and unambiguous and have the intended effect. • Remember that the precise terms of a notice clause must be complied with. • If you are making a claim, ensure that the notice is clear on its face that it is such a notice and that the contents comply in every respect with the requirements of the agreement. Despite the Court of Appeal decision in Dodika, don't rely on the circumstances rather than setting out all the required details. • If you are up against a contractual (or any other) time bar assume the least favourable interpretation of any deadlines and, if possible, don't leave service of a notice to just before the deadline, as there is then no room for error if things go wrong. Contract law update // 14 9. Developments in the contracting process Changes in the way that contracts are entered into, performed and managed were already evident before March 2020 but the upheavals to working practices caused by the Covid-19 restrictions have certainly accelerated the pace of change. More companies and law firms are using document automation to prepare initial drafts of documents and are constantly looking for ways to streamline the contracting process; automating straight-forward aspects of contractual relationships frees up time to focus on the more bespoke elements of a deal and also ensures a high level of consistency and improved risk management. The use of electronic signatures in general, and document signing platforms in particular, has expanded significantly during Covid-19 times, supported by the September 2019 Law Commission report on the electronic execution of documents which confirmed its view that, in principle, an electronic signature is capable in law of being used to execute a document. While the Covid-19 restrictions helped to promote the use of electronic signatures it is hard to imagine that we will revert to the more traditional methods of execution as restrictions are lifted. Companies are also looking at how to manage their contracts in a more effective and proactive way from contract creation through to execution, performance and expiry / renewal. Many are now using a variety of contract lifecycle management tools, often including AI and machine learning, to do this. And when disputes occur we are seeing technology playing its part in the conduct of commercial litigation. We are also seeing an increasing interest in smart legal contracts – legally binding contracts in which some or all obligations are performed automatically by a computer program that is usually run on a blockchain network. The Law Commission published a paper in November 2021 which confirms that English law can accommodate smart legal contracts without the need for statutory reform – for more information see this discussion by our digital law team. All of these changes are helping to lower costs, minimise the risk of human error and reduce loss of value through contract performance so it seems inevitable that this trend will continue in 2022 and beyond. Contract law update // 15 10. Contacts Julie Farley, Professional Support Lawyer T +44 20 7466 2109 M +44 7515 783 551 [email protected] Sarah Hawes, Head of Corporate Knowledge, UK T +44 20 7466 2953 M +44 7866 947 269 [email protected] Robert Moore, Partner T +44 20 7466 2918 M +44 780 9200441 [email protected] Sarah Pollock, Partner T +44 20 7466 2786 M +44 7809 200 522 [email protected] If you would like to receive more copies of this briefing, or would like to receive Herbert Smith Freehills briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please email [email protected] © Herbert Smith Freehills LLP 2022 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.
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